A few years ago I did a study on state Tax and Expenditure Limits (TELs). These are state rules—written into statutes or constitutions—which are designed to arrest the growth of state spending. New Jersey was the first state to adopt a TEL in 1976, and now about 30 states have some variety of TEL.
As I explained in a Wall Street Journal OpEd at the time, though fiscal conservatives have spent decades championing TELs, “these laws may actually be doing more harm than good.” The problem is that the most common variety of TEL—one that limits spending to some share of residents’ income—actually leads to more spending in high-income states. Not all TELs have this feature and my research suggests that the details matter. I found that TELs that limit spending growth to the sum of inflation and population growth, for example, seem to arrest spending in both high and low income states.
Now, Bemjamin Zycher of the American Enterprise Institute has revisited the question with an interesting and provocative new paper that reaches an even more pessimistic conclusion that I did.
Come to AEI tomorrow at noon where I and others will be discussing Zycher’s paper. Other discussants include Nicholas Johnson of the Center on Budget and Policy Priorities and Michael New of the University of Michigan-Dearborn. The event will be moderated by Mark Perry of AEI and the University of Michigan-Flint.
It promises to be a fun and lively discussion. Details here.
A few months back I wrote:
From the perspective of a worker, the point of a job is not simply to have a paycheck; it is to have a paycheck that permits one to buy useful goods and services.
This is an important point to keep in mind because so many policies—from subsidies and regulations to occupational licenses—simultaneously increase the prices paid by consumers and the incomes received by (some) producers. In fact, I’d go so far as to speculate that a majority of policies have this effect. (There are, of course, exceptions; taxes push consumer prices up and producer net-of-tax revenues down). From a public choice perspective, this makes sense: any one of these policies is likely to raise the incomes of a few well-connected producers by quite a bit while it is likely to raise the prices paid by a vast multitude by only a little. Even if, in aggregate, the price increases outweigh the income increases, it makes political if not economic sense for a politician to favor such a policy.
This is tragic because genuine economic progress is about both rising real incomes and falling real prices.
The indispensable Mark Perry makes this point beautifully in a classic and brief post from 2010 (I’m sorry, Mark, to quote the entire thing. But I can’t find anything worth leaving out):
In 1964, here’s what the average American consumer could afford after working 152 hours (almost a full month) at the average hourly wage then of $2.50: a “moderately priced, excellent stereo system” from Radio Shack on sale for $379.95.
In contrast, the typical consumer today working 152 hours at the current average hourly wage of $19 could afford this “cornucopia” of electronic goods:
Keep this in mind the next time you hear a politician plugging some new policy that promises to raise incomes. Will it also raise prices above what they would otherwise be? Is it worth it, on net?